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In an announcement today, the largest bitcoin mining pools and that represent over 70% of the cryptocurrency network’s hashing rate have, in a common consensus with major bitcoin exchanges and service providers, agreed with 90 percent of the Bitcoin Core contributors over the proposed roadmap for scaling bitcoin. In an announcement today, members of the […]

The thread drew attention to the fact that Uphold currently holds $116 million (£80 million) of a digital currency named "Voxel" in accounts on behalf of clients. Several other Reddit commenters picked up on this large deposit base.

Voxel is an as-yet untradable currency built for a virtual reality marketplace that hasn't launched yet. Total client deposits on Uphold are $124 million (£86.4 million). Only $5.8 million (£4 million) are deposits in non-Voxel currencies and assets.

Uphold keeps all clients funds in accounts rather than investing or lending some out. But it doesn't hold all the value deposited with it in the same asset class as it was deposited in — so you could make a deposit in Chinese yuan but Uphold may hold the equivalent value in US dollars.

That lead some Reddit posters to worry that people who had deposited other currencies and assets with Uphold would be exposed to the volatility of Voxel, a highly speculative currency.

Uphold CEO Anthony Watson says this is not the case. He says illiquid assets like Voxel are segregated from general funds. He told Business Insider: "When you net out the Voxel [deposits], we're still over-reserved."

"The reason why we have a large amount of Voxel on our platform is because we are the only company, so far, that allows you to hold Voxel in your digital wallet. At the end of March, early April, 7 exchanges will start openly trading Voxel and then it will be driven by the marketplace."

He added: "Let's say Voxel goes to zero tomorrow — no one's interested in it, no one wants to buy it. That makes zero difference to us. We're simply holding it in wallets. We're not actively trading it and we're not actively backing the asset either."

Uphold's founder and chairman, Halsey Minor, is also the cofounder and chairman of Voxelus, the company that issued Voxel. Voxelus is building a platform a little like a virtual reality Minecraft, which lets you build VR stuff. Voxel will be the digital currency used to buy and sell assets on the platform, like in-game add-ons.

But Uphold CEO Anthony Watson insists "there is no conflict of interest" with the two companies working so closely together. Watson, a former Barclays, Citi, and Nike executive, told Business Insider: "Voxelus is a separate company not related to Uphold, nor has Uphold invested in it in any way shape or form. Uphold is simply partnering with Voxelus.

"We've done this by the book and I'm very comfortable as the CEO of the company that there is no conflict of interest. Nor are the companies even engaged with each other at a management level. Halsey, as chairman of Uphold, only has one vote out of a board of seven people."

It's not clear who owns the vast majority on the platform but Watson confirmed Minor and other Voxelus executives are major holders.

Watson admitted: "We could have done a better job explaining what it was overall, but in terms of Halsey's role, in terms of Voxelus vs. Uphold, there is no conflict of interest, there is no deviation of duties, we've completely segregated them."

Uphold also hedges clients' non-Voxel deposits so their accounts don't lose value. But Voxel isn't involved in that hedging activity, it's completely separate, Watson says. "If you look at the broader hedging strategy, we do have quite complex algorithms that we use on a 24/7 basis, depending on what currencies people are focused on and how people are focused on them."

Cascarilla told us why banks are so excited about blockchain technology — first developed to underpin digital currency bitcoin — how he thinks it will be adopted, and what the plans for itBit are.

Read the edited highlights of the chat below.

Business Insider: How would you define blockchain? I'm always interested to hear people describe it because everyone seems to have a slightly different take.

Chad Cascarilla: It’s just a database — that’s all it is. It’s easy to lose track of it amongst the buzzwords.

But it was a big innovation in databasing because it’s fully distributed. A normal database, someone’s actually running it. On the blockchain, nobody’s running it because everybody’s running it. From that perspective, that’s a real big shift. That’s actually hard to underestimate because normally you’ve got to pay someone to run a database for you.

BI: What’s the itBit story — where are you guys coming from and where are you going?

CC: My background is in financial services, I’ve spent my whole life doing that. About five, five and a half years ago when it was just at a nickel, we came across bitcoin. What was interesting to us was the underlying blockchain technology, which is the topic du jour now but certainly wasn’t back then.

The reason it was interesting to us is because we didn’t really know how succcessful bitcoin itself would be but we could tell that the concept of being able to create a distributed clearing and settlement network or a distributed payment network was a pretty big deal. Not from a computer scientist perspective per se, but from a financial services perspective.

Our view has been that we want to take blockchains and apply them to financial services problems. When we started itBit three years ago, moving things over the blockchain — ownership of real assets — was to us the really exciting concept. Not that you can’t use it for other things — you can put land titles, copyrights, patents, you name it. You can put anything on a blockchain to move around in a common way. But you’ve got to start somewhere.

What became clear to us was you really needed some kind of regulatory structure because if you’re moving regulated assets it’s hard to do that without a regulated entity.

How can you create the on ramps and off ramps? You can do that by partnering with financial services firms — that’s helpful — but the more partners you need the slower development cycles happen. We created a trust company and about a year ago now we were approved.

BI: You guys were one of the first to get a license weren’t you?

CC: Yeah. We were the first trust company [in bitcoin]. There’s been one other created. I don’t think there’s anyone else who’s going to go down this route because we basically became a bank.

The concept was marry a bank with technology and then you can start doing some really innovative things with financial services. It’s hard to do truly innovative things with technology in existing banks because they have such complex systems.

BI: Especially at the moment when banks seem to be struggling to keep their head above water with existing regulation, let alone taking on any new technology.

CC: I think that’s exactly right.

Look at financial services: you have a trading layer where exchanges are — huge amounts of innovation have happened there. Then you have the layers below that — clearing and settlement, custody, depository.

Everything after the trading layer is sitting here run on mainframe computers programmed in the 1970s and 1980s — literally in COBAL [a mainframe programming language]. It’s a dead language. One of the biggest banks in the world only has five or six developers left who actually know how to programme these things.

One of the biggest banks in the world only has 5 or 6 developers left who actually know how to programme these things.

BI: Who’s that?

CC: I can’t say. But they’re all like that. They’re literally down to their last five or 10 developers.

In the late 1990s, that’s how trading was done too — on COBAL mainframes. But that was hugely innovated on.

But you haven’t had a reason to innovate on post-trade layers because everyone just thinks of those as costs. "Oh bookkeeping, that’s a cost, we’ll just throw some bodies at it."

Depending on the asset, people are still using excel spreadsheets, emails, PDFs to basically reconcile what’s going on in the back office. It’s still very much a bodies business. I would describe it as they’ve just digitised a paper process. They didn’t reimagine it.

If you think about internet 1.0, it’s kind of a digitisation of paper. But then you think about internet 2.0 — whether it be apps on your mobile or whatever — and it's totally, drastically changing the way we interact with information. That’s what needs to happen in the back offices of financial services.

That hasn’t happened because the switching costs are so unbelievably high because you’re regulated, you can’t innovate, and, frankly, the old systems work.

But now that capital charges are going up I think you’re getting into a different position.

BI: It seems from the industry perspective there’s also a bit of a herd mentality with blockchain that’s acting in its favour. Once one bank moves, all the others want to be involved too. How long have you been trying to pitch this to the banks?

CC: It’s a very long sales cycle. I probably started talking to them about this about February, March last year. It’s been a year. But the reason it’s a long sales cycle is these are big organisations — you’re working across groups and the technology is new.

I think the banks know that there’s a couple of things going on: you’re hitting the end of the usual life of these mainframe computers, at the same time that capital charges are going up, and revenues aren’t growing.

They need to figure out a way to cut costs that is innovative. They’re really taking a holistic look and saying: "OK, what are we doing here? Do we want the best version of yesterday’s technology?" They’re really trying to be thoughtful about it, some more than others.

BI: And your main product is Bankchain, is that right?

CC: Correct. When we say we’ve been pitching the bank for a year, we’re now at the point where we have partnerships that are underway, proof of concepts, implementations that are getting underway. We’ve got to the point where the rubber hits the road. Bankchain is our product that we’ve built to address financial services needs.

BI: Is it tailored to specific products?

CC: The core technology can work on anything — use case agnostic. That’s not surprising, in some ways that’s good engineering. [But] then you need to go out and say here’s a good use case. That’s what has the front end that’s tailored to precious metals or syndicated loans or equities settlement.

It’s complex to build the front end and the data layer hooking into the core databasing technology. Then you have to hook it into the current system of the people you’re working with.

BI: Is there any particular use cause that’s more popular than others?

CC: Post-trade is pretty huge. Oliver Wyman said it’s like an $80-85 billion market. That’s about a third of capital market revenues. So of all capital markets, about a third is sitting in post-trade — it’s enormous.

It’s hard to say people want to address just one specific area because they’ve got to address this whole thing. But you’ve got to drill down — if you want to try and fix syndicated loans with blockchain, you could be doing that for years.

If I think of the use cases that I know firms are working on it’s everything from cross-border payments to OTC derivatives to syndicated loans to equities to repo to precious metals to trade finance. Those are just some of them.

BI: How many banks and financial services firms are you in talks with?

CC: About a dozen. We have three use cases we’re focusing on and within those we have different partners. In capital markets, there are 25, maybe 50 at most, institutions that matter in the world — repositories, exchanges, buy side firms, sell side like the banks. Depending on what you’re trying to solve, you need to partner with these people.

BI: Does this technology need a critical mass to go mainstream? Obviously, the point of this is it’s distributed and you need multiple parties for that.

CC: No one wants to show up at the club and nobody else is there. There’s two ways you combat that.

No one wants to show up at the club and nobody else is there.

The first is you create a system that’s fully interoperable with today’s world. Because we’re a trust company we have our own SWIFT code, we have access to all the infrastructure, we have a whole variety of ways to interact with the world as it is now.

We have a way to move people incrementally to tomorrow — you can’t just get to a future state. You have to make it so that if you’re on [the Bankchain] you can interact with everyone who’s off and you have to make it relatively easy to do.

Secondly, you have to make sure that you go out and make sure that people are invested in this product, meaning they’re helping you build it, you’re getting ideas from them, it’s solving their needs. You can’t just create something that you think someone wants.

BI: How do you see initiatives like industry-wide blockchain consortium R3 — do you see it has competition? Or is it such a big market that there's room for both of you? Is it good that things like R3 are raising awareness?

I don’t know if anyone knows how R3’s strategy is going to evolve, it’s already evolved a lot from where they started. That’s not a surprise, that’s just the nature of new technologies and new groups.

Like I said, post-trade is a huge world. Some of the use cases the banks will be looking at will have no overlap with what we’re doing. It certainly seems that way so far.

BI: How are you guys funded?

CC: We’ve raised $32.5 million (£22.3 million) so far and it’s basically come from a combination of VCs and the management team. We’re going to obviously expand our funding base.

BI: Imminently?

CC: I’d say it’s something we’re spending a lot of time on because we want to grow the company and expand the use cases that we’re addressing. Digital Asset raised a round, others raised rounds — you need funding to be able to develop this kind of cutting edge software.

BI: And strike while the iron's hot.

CC: Yeah. You’ve got to be careful how you couch this stuff but yes we’re spending a lot of time thinking about this stuff.

BI: How long do you see industry adoption of blockchain taking?

CC: Again it gets down to use cases but lets just say people start doing proof of concepts and maybe even start having it rolled out in certain markets this year. I think you could see limited roll-out, we certainly hope to be rolling out in the precious metals market this year.

But I think realistically, this is a big upgrade cycle. It’s going to take a decade or more. If you’ve done 50 acquisitions as a bank, your capacity to just pull all those systems out and have confidence that it will all be ok — that’s really playing with fire. You can see why it would take them a long time.